February 22, 2024

Coastal GasLink (CGL) is a natural gas pipeline project in Canada transporting natural gas from the Montney gas play in northeastern British Columbia to the LNG Canada export facility near Kitimat on the coast of British Columbia. The CGL provides natural gas feedstock to LNG Canada’s liquefied natural gas export terminal, with capacity adequate for two phases of development, consisting of two 900 MMcf/d liquefaction trains in each phase.

Evolution to Higher Cost

Initially expected to cost C$6.6 billion (B, Cdn$), the CGL project has faced various controversies and protests, primarily involving First Nations communities and environmental groups. The pipeline route passes through the traditional territories of several First Nations communities. For the most part, CGL did a very good job consulting with Indigenous groups along the right of way. However, disputes within some First Nations bands led to acrimony and protests that involved police actions to enforce CGL’s legal right to build the pipeline.

Construction disruptions during COVID and resulting supply chain issues post-COVID have conspired to drive the cost of the project initially to C$11.2 B, in July 2022 when CGL and LNG Canada partners amended their agreement, to the current estimate for completion of C$14.5 B. Incorrys believes that tolling will be based initially on a C$11.2 B gas plant in-service. Phase 2 will provide significant pipeline toll reductions from additional throughput and a modest estimate of C$1 B investment for additional compression.

Figure 1: Impact of Higher Cost on Estimated Tolls

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Cdn$/US$ exchange at 1.35

Figure 1 illustrates tolls using Incorrys proprietary pipeline tolling model at various cost and throughput levels. Observations:

  • Initial cost estimates of C$7.6B (C$6.6B plus C$1B for expansion compression) would have resulted in tolls of C$0.75/Mcf (US$0.56/Mcf) at full phase 2 capacity.
  • Tolls based on full cost C$14.5 B and (only) phase 1 volumes would be C$2.75/Mcf (US$2.04/Mcf).
  • Tolls based on C$11.2B and phase 1 volumes would be C$2.10/Mcf (US$1.56/Mcf).
  • Tolls based on C$12.2 B (C$11.2B for phase 1 plus C$1B for phase 2 compression) would be C$1.25/Mcf (US$0.93/Mcf) at full phase 2 capacity.

The importance of steel in the ground cannot be understated, especially when combined with the low cost of doubling capacity via a modest investment in compression. British Columbia LNG projects are advantaged by shorter shipping distances to Asia and lower ambient temperatures than competing projects. Delivery into Asian markets without shipping barriers such as the Straits of Malacca, Panama Canal or Suez Canal will act as a catalyst for LNG Canada Phase 2. If LNG Canada Phase 2 is not sanctioned, other LNG developers are likely to take advantage of readily available expansion capacity from CGL steel in the ground.